House prices have recorded their biggest year-on-year decline in almost three years amid the toughening economy, Nationwide building society said today.

But the market has shown "resilience" compared with some other countries, despite the 2.6% annual drop taking average prices to £164,389 in July, Nationwide added.

UK house prices are 13% below their 2007 peak, but this is still less than the falls seen in the United States and Spain, which have seen
drops of around a fifth relative to their peak.

The study said the Bank of England's new "funding for lending" scheme could give a boost to the housing market, but with the eurozone crisis continuing, Nationwide expects to see only a "modest recovery" in
the coming months.

The latest research comes after the British Bankers' Association found that mortgage approvals slumped to their lowest number in at least
15 years in June.

Lenders have also been tightening their borrowing criteria and while there have been signs of increased competition to attract people with larger amounts of equity, borrowers with lower deposits are expected to have a tougher time finding a mortgage in the coming months.

Robert Gardner, Nationwide's chief economist, said: "UK house prices declined for the fourth time in five months in July, with prices falling by 0.7%.

"This pushed the annual pace of price growth down to minus 2.6%, from minus 1.5% in June - the weakest outturn since August 2009."

Mr Gardner said the unseasonal wet weather and the impact of the extra holiday due to the Queen's Diamond Jubilee can only partly explain
the "disappointing performance" of the wider economy.

He said: "Against this difficult backdrop, it could be argued that UK house prices have shown resilience.

"While prices are currently 13% below their 2007 peak, this is less than the declines seen in a number of other economies that have experienced similar or more robust economic recoveries."

The study said that along with a lack of building activity in recent years, a large part of the explanation for UK house prices performing relatively well probably relates to the "unexpected strength"
of the UK labour market.

Much of the housing market will depend on the ability of the economy to gain momentum, as a previous pattern of negative economic growth and steady employment growth cannot be sustained indefinitely, the study said.